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Over the past 20 years or so I’ve searched for a reliable method of research that would accurately identify market trends. From a fundamental point of view, I tried following interest rates, the rate of inflation, and the price of oil. All useful, none of these provided the accuracy needed to get in and out of the market at the beginning of trends. From a technical point of view, I have always been befuddled by technical research – Bollinger Bands, MACD, Parabolic SAR, etc. Within the past 18 months or so, I’ve come across a source of data that has piqued my interest. More important, it’s something that I can understand – Money Flow. It strikes me as being compellingly logical that the only force that moves stocks higher is the aggressiveness of buyers. Conversely, the only force that moves stocks lower is the aggressiveness of sellers. That's what Money Flow measures – the aggressiveness of buyers (buying stocks on upticks) and the aggressiveness of sellers (selling stocks on downticks). Here’s the logic behind my premise. If investors are buying stocks on upticks, isn’t it reasonable to assume that they believe prices are headed higher? If they believed that prices were headed lower, wouldn’t they just sit back and accumulate stock on downticks? Conversely, if sellers are selling stocks on downticks, isn’t it reasonable to assume that they believe prices are headed lower? If they believed that prices were headed higher, wouldn’t they just sit back and sell into a rising market on upticks? Unfortunately, the daily data that I use is available only for the 100 stocks with the highest dollar volume of upticks and a separate list for the 100 stocks with the highest dollar volume of downticks. I say “unfortunately” since a list of 100 stocks is obviously very limiting. However, since most of these trades are being done by institutions – and since institutions account for roughly 75% of all daily trades – this data offers a pretty good proxy for the market. Anyhow, I update both the Gainers and Losers charts daily. I compute a 30-day moving average of the total dollar value (millions) of money going into the 100 stocks with the highest dollar volume of upticks and the 100 stocks with the highest dollar volume of downticks. This data is then reduced to an easy to understand ratio. When the uptick value is higher than the downtick value (generating a ratio higher than 1.0) buyers are being more aggressive than sellers, indicating that money is flowing into the market (accumulation), which in turn suggests that the market is trending higher. When the downtick value is greater than the uptick value (generating a ratio lower than 1.0) sellers are being more aggressive than buyers, indicating that money is flowing out of the market (distribution), which in turn suggests that the market is trending lower. I also record the number of stocks that have appeared for 7 days out of the most recent 10-days on either list. Although it's impractical to identify all of those stocks, I will comment from time to time on stocks that have unusual money flow characteristics. If any of you have constructive thoughts that might contribute to this approach, we’d all like to read about them. | ||||||||||||
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